Global Asset Allocation, Politics & Governance, Ecstrat

John-Paul Smith

Global Asset Allocation, Politics & Governance

Ecstrat

Ecstrat is a consultancy advising on asset allocation between global equity markets, with a focus on the intersection of governments, geopolitics, governance and markets.
 
Over the past few years and more especially since the Great Financial Crisis (GFC), investors have become more focused on short-term market movements and real-time returns and have consequently neglected the analysis of the underlying structural themes that underpin longer term performance.
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More specifically we believe that the evolution of governance-based relationships between investors, controlling shareholders, labour and the state is one of the primary determinants of both relative and absolute performance between individual equity markets.
 
We will endeavour to provide investors with some of the context surrounding governance-related issues which encompass many different disciplines including history, economics and political science, as well as the financial metrics which are the most obvious manifestation of the structural characteristics of each market.
 
We will pay particular attention to the shifts and potential inflection points for governance in individual markets as these are often the best lead indicators for both economic and market performance.

Cross Asset Strategy

Multiple Countries / Cross Asset Strategy

The steady rise in most global equity markets over the first half of this year has been mainly driven by the weakness of the <a href="https://www.smartkarma.com/entities/22821" target="_blank" data-smartkarma-citation="entities:22821:1">USD (USD CURNCY)</a>, which has occurred on the back of the perceived impotence of Trump’s administration together with the apparent improvement in prospects for more market-friendly policies across much of Europe, excluding the UK. Some commentators have wondered why the Trump trade in the equity market has not unraveled, but the answer is that the weak dollar has reduced returns for most overseas investors, while providing relief for much of the emerging world especially China and driving down the risk premium on global equity markets. The decline in the oil price which has taken place over the second quarter, has also been a significant factor.The resultant flows into both equity and bond markets have proved irresistible across a variety of asset classes excepting most commodities, but emerging markets have been the biggest beneficiaries, especially the big oil importers such as India, Korea, Taiwan, China and Turkey. The oil price has also been a key driver for the only emerging market of any significant size to record a decline in absolute terms, namely Russia which was also impacted by the further deterioration in the relationship with the US. I have been resolutely bearish towards the oil price for the past ten years, due to structural factors, having drawn attention to the crowded long positions among financial investors earlier in the year.The flows into emerging markets have generally been of a scale to overwhelm any fundamental factors. The FT cites EPFR data that inflows into Bond ETFs over the year-to-date of $12.6bn have already surpassed the previous record of $10.9bn during the whole of 2016. The extent of bullish sentiment can be gauged by the success of the Argentinian government in issuing dollar bonds of 100 years’ duration at a yield of 7.9%, while sanctioned Russia has also issued $3bn worth of new paper to foreign investors.The increasing influence of passive flows is made clear by the 5.5% surge in the Saudi market in response to MSCI’s announcement of a review to potentially upgrade the market, against a backdrop of falling oil prices and a major reconfiguration within the ruling Saud dynasty. In contrast, the Argentinian equity market plunged in response to MSCI’s decision not to award a promotion to Emerging Market status.

The steady rise in most global equity markets over the first half of this year has been mainly driven by the weakness of the USD (USD CURNCY), which has occurred on the back of the perceived impotence of Trump’s administration together with the apparent improvement in prospects for more market-friendly policies across much of Europe, excluding the UK. Some commentators have wondered why the Trump trade in the equity market has not unraveled, but the answer is that the weak dollar has reduced returns for most overseas investors, while providing relief for much of the emerging world especially China and driving down the risk premium on global equity markets. The decline in the oil price which has taken place over the second quarter, has also been a significant factor.The resultant flows into both equity and bond markets have proved irresistible across a variety of asset classes excepting most commodities, but emerging markets have been the biggest beneficiaries, especially the big oil importers such as India, Korea, Taiwan, China and Turkey. The oil price has also been a key driver for the only emerging market of any significant size to record a decline in absolute terms, namely Russia which was also impacted by the further deterioration in the relationship with the US. I have been resolutely bearish towards the oil price for the past ten years, due to structural factors, having drawn attention to the crowded long positions among financial investors earlier in the year.The flows into emerging markets have generally been of a scale to overwhelm any fundamental factors. The FT cites EPFR data that inflows into Bond ETFs over the year-to-date of $12.6bn have already surpassed the previous record of $10.9bn during the whole of 2016. The extent of bullish sentiment can be gauged by the success of the Argentinian government in issuing dollar bonds of 100 years’ duration at a yield of 7.9%, while sanctioned Russia has also issued $3bn worth of new paper to foreign investors.The increasing influence of passive flows is made clear by the 5.5% surge in the Saudi market in response to MSCI’s announcement of a review to potentially upgrade the market, against a backdrop of falling oil prices and a major reconfiguration within the ruling Saud dynasty. In contrast, the Argentinian equity market plunged in response to MSCI’s decision not to award a promotion to Emerging Market status.

Rising Moral Hazard and Governance Issues Around Tech Threaten EM Bull Case